By Pam Krueger
Many people choose to work with fee-only financial advisors who are independent of brokerage firms or insurance companies and are legally held to the fiduciary standard because they want to know that the advice is truly in their best interest -- not a sales pitch connected to commissioned sales of mutual funds or insurance. The way you pay for that expert’s advice is then straightforward and clear; the advisor works only and directly for you. The question is how much should you expect to pay? All advisors – whether they’re investment advisors, asset managers, financial planners or wealth engineers – get paid based on what their time is worth, how complex your situation may be, and how much of their time is devoted to you each year.
The fees will vary based on the advisor, the type of work they do, the size of their team, and to some extent, their location. Typical advisor fees run from a low of about $200-$300 per hour. In addition to the investment advice, the planning is holistic -- meaning it includes an evaluation of all your assets such as real estate, cash flows from a small business, insurance coverages, 401(k)s and other retirement-savings plans, as well as tax planning. High-end planning that requires team input from other professionals, such as estate-planning lawyers, may cost $500 per hour or more.
How much time will you need?
For most advisors, the low end tends to be 20 hours per year, and the typical amount is about 30-40 hours per year. If you require more intensive one-on-one analysis, evaluation and help working through major money decisions, that might be more than 50 hours per year. That time might include both the advisor’s time as well as tapping into the team’s expertise. There is a guideline for budgeting for advisor fees ahead of time: Even if you’re not paying fees based on a percentage of your assets, you can make a rough estimate that the fees you’ll pay on a yearly basis generally won’t exceed the equivalent of 1% of your total assets.
What determines how much time you would need?
Simply put: complexity. Someone who has savings and investments of about $200,000 and may have several different retirement accounts, kids’ education funds, real estate and perhaps is self-employed with less predictable income and can expect to pay between $1,500 to $4,000 per year for full and robust ongoing financial planning -- including ongoing investment management and decision-making advice, retirement and tax planning, and real estate guidance. You might expect to meet or talk to and collaborate with your advisor three to four times a year.
Someone with a $500,000 portfolio and more complex financial needs can expect to pay about $5,000 per year for ongoing planning and investment management. They might be older and getting ready to sell a small business, or analyzing an early retirement package, planning for a child who has special needs or may have stock options to exercise. They may also have a more complicated tax situation and special financial-planning needs during certain life changes, such as dealing with a divorce, an inheritance, or when buying or selling rental properties.
As your investments grow and you build more retirement savings and streams of income, you may need more specific help. Someone who has built up a portfolio of about $2 million and wants ongoing investment management with portfolio rebalancing, tax planning, plus retirement income planning, can expect to pay about $15,000 per year in advice fees, give or take, depending on the hours it takes for the advisor to work on your case.
Do you always have to pay fees based on a percentage of assets the advisor manages?
No. There are different ways to pay a fee-only financial advisor. Many are paid based on a percentage of your assets under their management, and more advisors are now happy to charge based on the scope of the work or an ongoing yearly retainer, or they may charge a flat fee for a one-time plan or evaluation.
But all of these fees tend to lead to the same result
No matter which method is most comfortable for your budget, in the end the dollar amount of fees will be roughly the same because the final bill will be based on the amount of time the advisor expects to spend on your case. And yes, all advisor fees are negotiable to some extent.
When you do choose to pay an advisor based on assets under management – that fee is typically 1% or less of your assets that they manage. This method lets the advisor get paid more as your assets grow, which is justifiable assuming that advisor is creating a customized portfolio – in other words, a more active approach to investing not just using index funds or exchange-traded funds.
Does that advice fee include the discount brokerage transaction costs?
Typically you pay the discount brokerage firm to hold your money, but remember, the advisor is working hard to make sure those transaction costs are minimized. A qualified fee-only fiduciary advisor will make sure your money is held at a discount brokerage firm that charges the lowest available fees. Most advisors and planners are eligible for volume discounts that you couldn’t get on your own. Because they only get paid by you, their goal is to reduce the discount brokerage and all-in investment-related expenses. Independent fee-only advisors are legally held to the fiduciary standard which means they must be 100% transparent about all fees.
When you’re considering an advisor, ask these two questions
Start by asking who is your typical client, and what do you do for your clients? Then ask the advisor to explain their fees. What are your fees based on an hourly rate? What do typical clients who look like me usually pay per year?
The key take-away
Here’s where you can make back some of those fees: An excellent fee-only advisor will audit all of your existing investment accounts -- including your IRAs, 401(k)s and brokerage accounts -- and search for ways to drastically cut the unnecessary expenses, fund fees and transaction costs on your current investments. Many people are not even aware they are paying extraordinarily high investment management fees of over 1% year-over-year. In many cases, the advisor can find hundreds -- if not thousands -- of dollars in high-fee funds that you can easily substitute and cut those fees to less than half. That savings alone can help you cover the cost of the advice you get from working with a fee-only advisor.